**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-QSB**





x QUARTERLY
      REPORT
      UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the
      quarterly period ended June 30, 2006




o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the
      transition period from _________ to
_________


Commission
      file number   000-51006




**HARBIN
      ELECTRIC, INC.**


(Exact
      name of small business issuer in its charter)




**Nevada**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            **98-0403396**
              (I.R.S.
                Employer
              Identification
                Number)








**No.
      9 Ha Ping Xi Lu, Ha Ping Lu Ji Zhong Qu**


**Harbin
      Kai Fa Qu, Harbin, People’s Republic of China 150060**


(Address
      and telephone number of principal executive offices)




**Telephone:
      215-854-8104**


(Issuer’s
      telephone number)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or 15(d) of the Securities Exchange Act of 1934, during the past 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days. Yes  x No
o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No
x




**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**




Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after
      the distribution of securities under a plan confirmed by a court.
      Yes  x     No
o




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of August 11, 2006: 16,600,451 shares of common stock, par value $0.00001
      per
      share.




Transitional
      Small Business Disclosure Format (Check one): Yes o    No
x












**TABLE
      OF CONTENTS**




**Page****Part
                I. Financial Information**Item
                1. Financial Statements (Unaudited)
            1Consolidated
                Balance Sheet (Unaudited) as of June 30, 2006
            1Consolidated
                Statements of Operations (Unaudited)For
                the Three and Six Months Ended June 30, 2006 and 2005
            2Consolidated
                Statements of Cash FlowsFor
                the Six Months Ended June 30, 2006 and 2005
            3Consolidated
                Statements of Stockholders’ EquityFor
                the Six Months Ended June 30, 2006
            5Notes
                to the Consolidated Financial Statements
            7Item
                1A. Risk Factors
            18Item
                2. Management’s Discussion and Analysis or Plan of
                Operation
            23Item
                3. Controls and Procedures
            27**Part
                II. Other Information**Item
                1. Legal Proceedings.
            27Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.
            27Item
                3. Defaults upon Senior Securities.
            27Item
                4. Submission of Matters to a Vote of Securities Holders.
            27Item
                5. Other Information.
            27Item
                6. Exhibits.
            28Signatures
            29Index
                to Exhibits








**PART
      I. FINANCIAL INFORMATION**




**Item
      1.**  **Financial
      Statements**


**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**(UNAUDITED)**




**ASSETS**
            
            **As
                of June 30, 2006**CURRENT
                ASSETS:Cash
                & cash equivalents
            
            $
            11,494,797Accounts
                receivable, net of allowance for uncollectible accounts of
                $30,000
            
            
            8,395,448Inventory
            
            
            908,562Advances
                to suppliers
            
            
            4,601,117Prepaid
                expenses
            
            
            5,096Total
                current assets
            
            
            25,405,020PROPERTY
                AND EQUIPMENT, net
            
            
            7,876,280INTANGIBLE
                ASSETS, net
            
            
            306,630TOTAL
                ASSETS
            
            $
            33,587,930**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            773,663Payment
                in advance
            
            
            673,924TOTAL
                CURRENT LIABILITIES
            
            
            1,447,587STOCKHOLDERS'
                EQUITYCommon
                  stock, .00001 par value; authorized shares 100,000,000; issued
                  and outstanding 16,600,451 shares
            
            
            166Additional
                paid in capital
            
            
            11,627,676Statutory
                reserves
            
            
            2,967,560Accumulated
                other comprehensive income
            
            
            732,650Retained
                earnings
            
            
            16,812,292Total
                stockholders' equity
            
            
            32,140,344TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            33,587,930


The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.




-
          1
          -





**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




**FOR
                THE SIX MONTH**
            
            **FOR
                THE THREE MONTH****PERIODS
                ENDED**
            
            **PERIODS
                ENDED****June
                30, 2006**
            
            **June
                30, 2005**
            
            **June
                30, 2006**
            
            **June
                30, 2005**Net
                revenue
            
            $
            18,590,003
            
            $
            9,402,739
            
            $
            9,711,345
            
            $
            5,274,442Cost
                of revenue
            
            
            9,515,476
            
            
            4,598,080
            
            
            4,910,553
            
            
            2,520,020Gross
                profit
            
            
            9,074,527
            
            
            4,804,659
            
            
            4,800,791
            
            
            2,754,422Operating
                expenses:Selling
                expenses
            
            
            424,606
            
            
            124,333
            
            
            216,600
            
            
            17,745General
                and administrative expenses
            
            
            1,833,000
            
            
            394,001
            
            
            924,243
            
            
            142,301Total
                operating expenses
            
            
            2,257,607
            
            
            518,334
            
            
            1,140,842
            
            
            160,046Income
                from operations
            
            
            6,816,920
            
            
            4,286,325
            
            
            3,659,949
            
            
            2,594,376Non-operating
                IncomeRealized
                gain on sale of marketable securities
            
            
            571,143
            
            
            -
            
            
            -
            
            
            -Other
                income (expense)
            
            
            53,148
            
            
            -
            
            
            (914
            )
            
            -Interest
                income
            
            
            31,030
            
            
            14,118
            
            
            18,709
            
            
            13,824Net
                income
            
            
            7,472,241
            
            
            4,300,443
            
            
            3,677,744
            
            
            2,608,200Other
                comprehensive item:Unrealized
                gain on marketable securities
            
            
            -
            
            
            (145,645
            )
            
            -
            
            
            -Translation
                gain
            
            
            322,355
            
            
            -
            
            
            80,612
            
            
            -Reclassification
                adjustment for gains on sale of marketable securities
            
            
            (587,171
            )
            
            -
            
            
            -
            
            
            (159,645
            )Comprehensive
                Income
            
            $
            7,207,425
            
            $
            4,154,798
            
            $
            3,758,355
            
            $
            2,448,555Basic
                weighted average shares outstanding
            
            
            16,600,451
            
            
            15,000,450
            
            
            16,600,451
            
            
            15,000,450Basic
                net earnings per share
            
            $
            0.45
            
            $
            0.29
            
            $
            0.22
            
            $
            0.17Diluted
                weighted average shares outstanding
            
            
            17,245,535
            
            
            15,125,588
            
            
            17,350,758
            
            
            15,125,588Diluted
                net earnings per share
            
            $
            0.43
            
            $
            0.28
            
            $
            0.21
            
            $
            0.17




The
      accompanying notes are an integral part of these consolidated financial
      statements.





-
          2
          -





**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





**FOR
                THE SIX MONTH PERIODS ENDED****June 30,
                2006**
            
            **June
                30, 2005****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            7,472,241
            
            $
            4,300,443Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            146,512
            
            
            211,290Realized
                gain on sale of marketable securities
            
            
            (571,143
            )
            
            -Stock
                based compensation
            
            
            330,000
            
            
            -(Increase)
                decrease in current assets:Accounts
                receivable
            
            
            (2,490,257
            )
            
            (1,900,326
            )Inventory
            
            
            444,295
            
            
            1,411Advances
                to suppliers
            
            
            (1,826,602
            )
            
            (1,183,090
            )Other
                assets
            
            
            (960
            )
            
            -Increase
                in current liabilities:Accounts
                payable
            
            
            583,747
            
            
            414,336Payment
                in advance
            
            
            670,950
            
            
            -Accrued
                expenses
            
            
            -
            
            
            (116,650
            )Net
                cash provided by operating activities
            
            
            4,758,783
            
            
            1,727,414**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Proceeds
                from sale of marketable securities
            
            
            1,093,165
            
            
            -Acquisition
                of intangible assets
            
            
            -
            
            
            (266,200
            )Acquisition
                on property & equipment
            
            
            (175,582
            )
            
            (210,888
            )Net
                cash provided by (used in) investing activities
            
            
            917,583
            
            
            (477,088
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Due
                to related party
            
            
            -
            
            
            87,360Advances
                to related party
            
            
            -
            
            
            206,309Net
                cash provided by financing activities
            
            
            -
            
            
            293,669**EFFECT
                OF EXCHANGE RATE CHANGE ON CASH & CASH
                EQUIVALENTS**
            
            
            79,412
            
            
            -




-
          3
          -




**NET
                INCREASE IN CASH & CASH EQUIVALENTS**
            
            
            5,755,778
            
            
            1,543,995**CASH
                & CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            5,739,019
            
            
            2,210,803**CASH
                & CASH EQUIVALENTS, END OF PERIOD**
            
            $
            11,494,797
            
            $
            3,754,798




The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.




-
          4
          -





**HARBIN
      ELECTRIC, INC. & SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**FOR
      THE PERIOD ENDED JUNE 30, 2006**




Common
                  StockNumber
                      of shares
              
              Amount
              
              Additional
                    paid in capital
              
              Subscription
                  receivable
              
              Shares
                    to be issued
              
              Statutory
                    reserves
              
              Other
                      comprehensive income (loss)
              
              Retained
                      earnings (deficit)
              
              Total
                      stockholders' equityBalance
                  as ofDecember
                  31, 2003
              
              
              1,357,466
              
              $
              14
              
              $
              725,986
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (3,880
              )
              $
              722,120Issuance
                  of subsidiary's stock
              
              
              10,642,534
              
              
              106
              
              
              5,771,736
              
              
              (4,862,256
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              909,586Accrued
                  interest on subscription receivable
              
              
              -
              
              
              -
              
              
              125,859
              
              
              (125,859
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Unrealized
                  loss on investment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (102,245
              )
              
              -
              
              
              (102,245
              )Net
                  income for the year ended December
                  31, 2004
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,311,333
              
              
              2,311,333Allocation
                  to statutory reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              346,700
              
              
              -
              
              
              (346,700
              )
              
              -Balance
                  as ofDecember
                  31, 2004
              
              
              12,000,000
              
              
              120
              
              
              6,623,581
              
              
              (4,988,115
              )
              
              -
              
              
              346,700
              
              
              (102,245
              )
              
              1,960,753
              
              
              3,840,794Recapitalization
                  on reverse acquisition
              
              
              3,000,451
              
              
              30
              
              
              (30
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forward
                  stock split
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -Shares
                  to be issued (786,000) for acquisition of JV
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Subscription
                  receivable exchange for Property & equipment
              
              
              -
              
              
              -
              
              
              -
              
              
              4,862,256
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,862,256Accrued
                  interest on subscription receivable
              
              
              -
              
              
              -
              
              
              (125,859
              )
              
              125,859
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Shares
                  issued for cash
              
              
              1,600,000
              
              
              16
              
              
              4,799,984
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,800,000Allocation
                  to statutory reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,500,024
              
              
              -
              
              
              (1,500,024
              )
              
              -
 -
              5
              -
 Items
                  of other comprehensive income:Unrealized
                  gain on investment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              587,171
              
              
              -
              
              
              587,171Shares
                  to be issued for Joint Venture
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Foreign
                  currency translation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              512,540
              
              
              -
              
              
              512,540Net
                  income for the year ended December 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,000,158
              
              
              10,000,158Balance
                  as of
                December
                  31, 2005
              
              
              16,600,451
              
              
              166
              
              
              11,297,676
              
              
              -
              
              
              -
              
              
              1,846,724
              
              
              997,466
              
              
              10,460,887
              
              
              24,602,919Allocation
                  to statutory reserves
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,120,837
              
              
              -
              
              
              (1,120,837
              )
              
              -Stock
                  option vested
              
              
              
              
              
              -
              
              
              330,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              330,000Unrealized
                  gain on investment
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (587,171
              )
              
              -
              
              
              (587,171
              )Foreign
                  currency translation
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              322,355
              
              
              -
              
              
              322,355Net
                  income for the six month period ended June 30, 2006
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,472,241
              
              
              7,472,241Balance
                  as of June 30, 2006
              
              
              16,600,451
              
              $
              166
              
              $
              11,627,676
              
              $
              -
              
              $
              -
              
              $
              2,967,560
              
              $
              732,650
              
              $
              16,812,292
              
              $
              32,140,344




The
      accompanying notes are an integral part of these
      unaudited consolidated financial statements.


-
          6
          -


**HARBIN
      ELECTRIC, INC. AND SUBSIDIARIES**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2006**


(Unaudited)




**1. ORGANIZATION
      AND DESCRIPTION OF BUSINESS**





Harbin
      Tech Full Electric Co., Ltd. (“HTFE”) was incorporated and formerly known as
      Harbin Tech Full Technology Development Co., Ltd. (“HTFTD”). On July 12, 2004,
      the Board of Directors of HTFTD approved to change the name of HTFTD to Harbin
      Tech Full Electric Co., Ltd. HTFE is engaged in the business of manufacturing
      and marketing of Linear Motors and special electric motors. HTFE has domestic
      patents for commercial applications of linear motors.




Tech
      Full
      International, Inc. (“TFI”) was a Delaware corporation, incorporated on August
      24, 2004. TFI was a non-operative holding company of HTFE.




On
      August
      31, 2004, TFI entered into an agreement with all the shareholders of HTFE to
      exchange all of the outstanding stock of TFI for all the outstanding stock
      of
      HTFE. After the consummation of the agreement, the former shareholders of HTFE
      owned 1,500 shares of common stock of TFI, which represented 100% of TFI’s
      issued and outstanding shares. For U.S. Federal income tax purposes, the
      transaction is intended to be qualified as a tax-free transaction under section
      351 of the Internal Revenue Code of 1986, as amended.




The
      exchange of shares between TFI and the shareholders of HTFE has been accounted
      for as a reverse acquisition under the purchase method of accounting since
      the
      shareholders of HTFE obtained control of the consolidated entity. Accordingly,
      the merger of the two companies has been recorded as a recapitalization of
      HTFE,
      with HTFE being treated as the continuing entity.  The historical financial
      statements presented are those of HTFE. The continuing company has retained
      December 31 as its fiscal year end. The financial statements of the legal
      acquirer are not significant; therefore, no pro forma financial information
      is
      submitted.




On
      January 24, 2005, the TFI consummated a merger agreement with Torch Executive
      Services Ltd. ("Torch"), a Nevada corporation, under which Torch issued
      8,000,000 shares of Torch to the shareholders of TFI, and under which TFI merged
      into Torch Subsidiary, Inc., a Delaware corporation (“TSI”) and an acquisition
      subsidiary of Torch, with TSI being the surviving entity. Subsequently, the
      TSI
      changed its name to Advanced Electric Motors, Inc. (“AEM”). As a part of the
      merger, Torch cancelled 5,000,000 shares of its issued and outstanding stock
      owned by its former president. The exchange of shares with Torch has been
      accounted for as a reverse acquisition under the purchase method of accounting
      since the shareholders of TFI obtained control of Torch. Accordingly, the merger
      of the two companies has been recorded as a recapitalization of TFI, with TFI
      being treated as the continuing entity. The financial statements of legal
      acquiree are not significant; therefore, no pro forma financial information
      is
      submitted.




Torch
      was
      incorporated in the State of Nevada on July 9, 2003. Torch was a development
      stage company in the business of providing luxury travel and concierge services
      on a personalized one-to-one basis as well as through the internet.




As
      a part
      of the merger, Torch was renamed to Harbin Electric, Inc. (the “Company”) and
      the Company declared a stock dividend of one-half share on each share of its
      common stock outstanding for all shareholders on record as of January 26, 2005.
      All per share data including earnings per share has been retroactively restated
      to reflect the stock split.




In
      connection with the transactions described above, the Company changed its fiscal
      year end to December 31.




**Joint
      Venture with Baldor Electric Company**




On
      January 12, 2005, HTFE entered into an agreement with Harbin Tech Full Industry
      Co., Ltd. ("HTFI"), pursuant to which HTFI agreed to transfer all of its
      interests in a joint venture with Baldor Electric Company (“Baldor”) to HTFE. In
      exchange for the transfer of the interests in the joint venture, HTFE agreed
      to
      cause its publicly traded holding company to issue 1,000,000 shares of Harbin
      Electric, Inc.'s common stock to HTFI as a payment for the transfer of the
      joint
      venture interests. On May 12, 2005, HTFE and the Company signed a written
      Consent amending the Share Transfer Agreement whereby HTFE and the Company
      agreed that the Company is to issue 786,885 shares of the Company’s common stock
      for the transfer of HTFE’s interest in the joint venture, as opposed to the
      1,000,000 shares as set forth in the original Share Transfer Agreement dated
      January 12, 2005.




In
      accordance with the Joint Venture Agreement, HTFI has a 65% equity ownership
      in
      the joint venture and Baldor has the remaining 35%. HTFI will receive 55% of
      the
      profits from the joint venture with the remainder of the profits going to
      Baldor. The Chief Executive Officer and Chairman of the Company and the
      Company’s majority shareholder is also the principal owner of HTFI.




-
          7
          -




Effective
      as of November 20, 2005, HTFI, HTFE and the Company signed a written consent
      to
      terminate the Share Transfer Agreement which was dated as of January 12, 2005,
      and amended and restated as of May 12, 2005. The initial transaction was
      recorded at the carrying value in the books of HTFE in accordance with FAS
      141
      as the transaction was between entities under common control. On termination,
      the joint venture was deconsolidated, the initial transaction was reversed
      and
      no gain or loss was recorded. The joint venture had no operations during the
      year 2005 and six month period ended June 30, 2006. The shares contemplated
      in
      the transaction were never issued.




**2. BASIS
      OF
      PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





The
      accompanying unaudited financial statements of the Company have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      information. Accordingly, they do not include all of the information required
      by
      generally accepted accounting principles for complete financial statements.
      In
      the opinion of management, all adjustments (consisting of normal recurring
      adjustments) considered necessary for a fair presentation have been included.
      Operating results for the interim periods are not necessarily indicative of
      the
      results for any future period. These statements should be read in conjunction
      with the Company's audited financial statements and notes thereto for the fiscal
      year ended December 31, 2005. The results of the six month periods ended June
      30, 2006 are not necessarily indicative of the results to be expected for the
      full fiscal year ending December 31, 2006.




**Use
      of estimates**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates.




**Cash
      and cash equivalents**





Cash
      and
      cash equivalents include cash in hand and cash in time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less.




**Accounts
      receivable**





The
      Company’s policy is to maintain reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer credit
      worthiness, current economic trends and changes in customer payment patterns
      to
      evaluate the adequacy of these reserves. The Company had accounts receivable
      of
      $8,395,448 as of June 30, 2006. Allowance for doubtful debts amounted to $30,000
      as of June 30, 2006.




**Advances
      to suppliers**





The
      Company advances to certain vendors for purchase of its material. The advances
      to suppliers amounted to $4,601,117 as of June 30, 2006.




**Investment
      in marketable securities**





Securities
      available for sale are carried at fair value with unrealized gains and losses
      reported as other comprehensive income in the stockholders’ equity section of
      the balance sheet. Realized gains and losses on securities available for sale
      are included in other income (expense) and, when applicable, are reported as
      a
      reclassification adjustment in other comprehensive income. Gains and losses
      on
      the sale of available for sale securities are determined using the
      specific-identification method.




The
      total
      proceeds from the sale of marketable security were $1,093,165 during the six
      month period ended June 30, 2006 and the realized gain was $571,143. The company
      determines cost on specific identification method. The reclassification
      adjustment in the statement of operations and comprehensive income relates
      to
      the release of unrealized gain on marketable securities on the marketable
      securities sold during the period. As of June 30, 2006, the Company did not
      have
      any marketable securities on hand.




-
          8
          -




**Inventory**





Inventory
      is composed of raw material for manufacturing the electrical motor, work in
      process, and finished goods. Inventory is valued at the lower of cost or market
      value using weighted average method. The management compares the cost of
      inventory with the market value and allowance is made for writing down the
      inventory to its market value, if lower. Inventory amounted to $908,562 as
      of
      June 30, 2006.





**Revenue
      recognition**





The
      Company’s revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectibility is reasonably assured. Revenue from sales requiring
      installment services is recognized as the installments are performed. Payments
      received before all of the relevant criteria for revenue recognition are
      satisfied are recorded as payment in advance.





**Income
      taxes**





The
      Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.





According
      to the Provisional Regulations of the People's Republic of China on Income
      Tax,
      the Document of Reductions and Exemptions of Income Tax for the Company has
      been
      approved by the local tax bureau and the Management Regulation of Harbin
      Economic and Technological Development Zone for the reporting period. The
      Company is exempted from income tax from July 1, 2004 through June 30, 2006.
      According to the “Foreign Invested Enterprise and Foreign Enterprise Income Tax
      Law of People’s Republic of China” and its implementation rules, the Company is
      exempted from income tax prolong through December 31, 2007.





**Fair
      value of financial instruments**





Statement
      of financial accounting standard No. 107, “Disclosures about Fair Value of
      Financial Instruments,” requires that the Company disclose estimated fair values
      of financial instruments. The carrying amounts reported in the statements of
      financial position for current assets and current liabilities qualifying as
      financial instruments are a reasonable estimate of fair value.





**Foreign
      currency transactions and comprehensive income (loss)**





Assets
      and liabilities in foreign currency are recorded at the balance sheet date
      at
      the rate prevailing on that date. Items of income statement are recorded at
      the
      average exchange rate. Gain or loss on foreign currency transactions are
      reflected on the income statement. Gain or loss on financial statement
      translation from foreign currency are recorded as a separate component in the
      equity section of the balance sheet, as component of comprehensive income.
      The
      functional currency of the Company is Chinese Renminbi.





**Segment
      reporting**





Statement
      of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About
      Segments of an Enterprise and Related Information," requires use of the
      "management approach" model for segment reporting. The management approach
      model
      is based on the way a company's management organizes segments within the company
      for making operating decisions and assessing performance. Reportable segments
      are based on products and services, geography, legal structure, management
      structure, or any other manner in which management disaggregates a company.





SFAS
      131
      has no effect on the Company's financial statements as substantially all of
      the
      Company's operations are conducted in one industry segment. The Company consists
      of one reportable business segment. All of the Company's assets are located
      in
      People's Republic of China.




-
          9
          -




**Recent
      pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
      This statement applies to all voluntary changes in accounting principle and
      requires retrospective application to prior periods' financial statements of
      changes in accounting principle, unless this would be impracticable. This
      statement also makes a distinction between "retrospective application" of an
      accounting principle and the "restatement" of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005.





In
      February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments.” SFAS No. 155 amends SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities,” and SFAF No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.” SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company’s first fiscal year that begins
      after September 15, 2006.





In
      December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
      an
      Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
      companies to recognize in the statement of operations the grant date fair value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company's first quarter of fiscal 2006.





In
      June
      2005, the EITF reached consensus on Issue No. 05-6, determining the Amortization
      Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides guidance
      on
      determining the amortization period for leasehold improvements acquired in
      a
      business combination or acquired subsequent to lease inception. The guidance
      in
      EITF 05-6 will be applied prospectively and is effective for periods beginning
      after June 29, 2005. EITF 05-6 is not expected to have a material effect on
      its
      consolidated financial position or results of operations.




In
      March
      2006, FASB issued SFAS 156, “Accounting
      for
      Servicing of Financial Assets.” This Statement
      amends FASB Statement No. 140, “Accounting
      for
      Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,”
      with respect to the accounting for separately recognized servicing assets and
      servicing liabilities. This Statement:




1.
            
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract.


2.
            
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if practicable.


3.
            
            Permits
                an entity to choose “Amortization
                Method”
                or “Fair
                Value
                Measurement Method”
                for each
                class of separately recognized servicing assets and servicing liabilities:


4.
            
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a service elects to subsequently
                measure at fair value.


5.
            
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities.




This
      Statement is effective as of the beginning of the Company’s first fiscal year
      that begins after September 15, 2006. Management believes that this statement
      will not have a significant impact on the consolidated financial
      statements.




-
          10
          -




**Reclassifications** ******





Certain
      prior period amounts have been reclassified to conform to the current period
      presentation.





**3. PRINCIPLES
      OF
      CONSOLIDATION**





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiary, HTFE. All significant inter-company
      accounts and transactions have been eliminated in consolidation.





**4. MAJOR
      CUSTOMERS AND VENDORS**





Four
      major customers accounted for 81% of the net revenue for the six month period
      ended June 30, 2006. One major customer accounted for 31% of the net revenue
      for
      the six month period ended June 30, 2006. At June 30, 2006, the total receivable
      balance due from these customers was $7,519,460. Two major customers accounted
      for 81% of the net revenue for the six month period ended June 30, 2005. At
      June
      30, 2005, the total receivable balance due from these two customers was
      $1,303,170 and $594,171, respectively.





Four
      vendors provided 86% of the Company’s purchase of raw materials for the six
      month period ended June 30, 2006. The Company’s accounts payable to these
      vendors was $0 at June 30, 2006. Three vendors provided 84% of the Company’s raw
      materials for the six month period ended June 30, 2005. The Company’s accounts
      payable to these vendors was $1,815 at June 30, 2005.





The
      Company extends credit to its customers based upon its assessment of their
      credit worthiness and generally does not require collateral. Credit losses
      have
      not been significant.





In
      addition, the Company enters into non-cancelable purchase commitments with
      its
      vendors. As of December 31, 2004, December 31, 2005, March 31, 2006, and June
      30, 2006, the Company was obligated under the non cancelable commitments to
      purchase materials amounting to $223,000, $793,000, $428,000, and $670,400,
      respectively.





**5. INTANGIBLE
      ASSETS**





Intangible
      assets consist of Patents. The Company is amortizing the intangible assets
      over
      3 year period. The Company evaluates intangible assets for impairment, at least
      on an annual basis and whenever events or changes in circumstances indicate
      that
      the carrying value may not be recoverable from its estimated future cash flows.
      Recoverability of intangible assets, other long-lived assets and, goodwill
      is
      measured by comparing their net book value to the related projected undiscounted
      cash flows from these assets, considering a number of factors including past
      operating results, budgets, economic projections, market trends and product
      development cycles. If the net book value of the asset exceeds the related
      undiscounted cash flows, the asset is considered impaired, and a second test
      is
      performed to measure the amount of impairment loss. As of June 30, 2006, no
      impairment of intangible assets has been recorded.





Net
      intangible assets at June 30, 2006 were as follows:


**Patents**
            
            $
            398,044**Less
                accumulated amortization**
            
            
            (91,414
            )$
            306,630





Amortization
      expense for the six month periods ended June 30, 2006 and June 30, 2005 amounted
      to $28,432 and $26,172, respectively.





Amortization
      expense for the Company’s current amortizable intangible assets over the next
      five twelve month periods is estimated to be: 2007 -$60,145; 2008 -$60,145;
      2009
      -$60,145; 2010 -$60,145; and 2011 -$10,024.





**6. STOCKHOLDERS’
      EQUITY**





Harbin
      Tech Full Electric Co. Ltd. (“HTFE”) was founded in the People’s Republic of
      China on April 10, 2003. Upon its inception, HTFE issued 6,000,000 shares of
      its
      common stock for $726,000 to four shareholders. On July 12, 2004, HTFE issued
      47,000,000 shares of its common stock for subscription receivable of $5,771,842
      from a related party. Immediately after the issuance, HTFE had 53,000,000 shares
      of stock issued and outstanding. Through December 31, 2004, HTFE had
      subscription receivable $4,862,256 from its shareholders. The Company accrued
      interest at 5.86% on the subscription receivable amounting to $125,859 through
      December 31, 2004. The Company completed the process of acquiring the plant
      facility in exchange of the subscription receivable in the beginning of year
      2005. This transaction was with a company owned by the majority shareholder
      of
      the Company. Because the transfer of assets was between entities under common
      control, the assets were recorded at cost which was the carryover basis in
      the
      books of HTFE.




-
          11
          -




On
      August
      31, 2004 all shareholders of HTFE entered into an agreement with Tech Full
      International, Inc. (TFI) to exchange all of their outstanding shares of HTFE
      for 1,500 shares of common stock of TFI which constituted 100% of TFI’s issued
      and outstanding shares. After the consummation of the agreement, the former
      shareholders of HTFE owned all outstanding and issued shares of TFI.





On
      January 12, 2005, TFI and its shareholders entered into a merger agreement
      (“Merger Agreement”) with Torch Executive Services, Inc. (Torch) and a wholly
      owned subsidiary of Torch, Torch Subsidiary, Inc. (“TSI”). At the closing which
      occurred on January 24, 2005, TFI was merged with and into TSI and the separate
      existence of TFI ceased. On the date of the merger, there were 7,000,300 shares
      of common stock of Torch outstanding. As a part of the merger, 8,000,000
      restricted shares of Torch were issued to the shareholders of TFI and the former
      president, sole director and majority shareholder of Torch returned 5,000,000
      shares of Torch to the treasury which was subsequently cancelled. After the
      merger, there were 10,000,300 shares of stock of Torch outstanding.





On
      January 24, 2005 the Company declared a stock dividend of one-half share for
      each share of its stock outstanding to all stockholders of record as of January
      26, 2005, after the Merger Agreement. The stock dividend was payable on January
      27, 2005. The Company has a total of 16,600,451 shares of common stock
      outstanding as of December 31, 2005.





On
      January 12, 2005 HTFE entered into an agreement with related party Harbin Tech
      Full Industry Co., Ltd. (“HTFI”), pursuant to which HTFI agreed to transfer all
      of its interests in joint venture with Baldor Electric Company to HTFE in
      exchange for the Company to issue 1,000,000 shares of its common stock to HTFI.
      On May 12, 2005, HTFE and the Company signed a written Consent amending the
      Share Transfer Agreement whereby HTFE and the Company agreed that the Company
      is
      to issue 786,885 shares of the Company’s common stock for the transfer of HTFE’s
      interest in the joint venture, as opposed to the 1,000,000 shares as set forth
      in the original Share Transfer Agreement dated January 12, 2005. The Company
      allocated 786,885 shares of its common stock for issuance in connection with
      the
      transfer of the joint venture interest. The shares have not been issued as
      of
      December 31, 2005. As the transaction was between entities under common control,
      the transaction was recorded at the historical cost basis The Company issued
      shares at fair value equal to the recorded cost On November 20 2005, HTFI,
      HTFE
      and the Company signed a written consent to terminate the Share Transfer
      Agreement (see note 1).





On
      August
      31, 2005, Harbin Electric, Inc. entered into Securities Purchase Agreements
      with
      institutional investors and other accredited investors to sell an aggregate
      of
      1,600,000 shares of the Company’s common stock, par value $0.00001 at a price of
      $3.00 per share together with options to purchase an aggregate of 480,000 shares
      of common stock at $3.50 per share (the "Private Placement"). The Private
      Placement is being entered into pursuant to Regulation D of the Securities
      Act
      of 1933. The options have registration rights, however, there is no penalty
      or
      liquidated damages clause if the Company fails to register the shares upon
      exercise of the options. The Company is not obligated to buy back the options.
      Accordingly, in accordance with EITF 00-19, the options are classified as
      equity. The fair value of the options was calculated using the Black-Scholes
      options pricing model using the following assumptions: Volatality 66%; risk
      free
      interest rate 4.13%, dividend yield of 0% and expected term of 5
      years.




Following
              is a summary of the stock options (non-compensatory options)
              activity:
  Options
                          outstanding
                      
                      Weighted
                          Average Exercise Price
                      
                      Aggregate
                          Intrinsic ValueOutstanding,
                          December 31, 2005
                      
                      
                      480,000
                      
                      $
                      3.50
                      
                      $
                      2,182,090Granted
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Outstanding,
                          June 30, 2006
                      
                      
                      480,000
                      
                      $
                      3.50
                      
                      $
                      2,783,478
  Following
              is a summary of the status of options (non-compensatory options) outstanding
              at
              June 30, 2006:
  Outstanding
                          Options
                      Exercisable
                          OptionsExercise
                          Price
                      Number
                      Average
                          Remaining Contractual Life
                      Average
                          Exercise Price
                      Number
                      Average
                          Excercise Price$3.50
                      480,000
                      4.17
                      $3.50
                      480,000
                      $3.50


On
      September 18, 2005, the Company received $4,800,000 from the Private Placement.
      HTFE’s total registered capital as of June 30, 2006 has been increased to
      $11,200,000.





**7.** **STOCK-BASED
      COMPENSATION PLAN** ****





In
      May
      2005 the Board of Directors of the Co mpany
      adopted and approved the 2005 Stock Option Plan (the “Plan”) which authorized
      the issuance of up to 1,500,000 shares under the Plan.




-
          12
          -




On
        January 31, 2005, the Company granted a total of 150,000 stock options to
        purchase shares of its common stock to three directors of the Company under
        the
        Company's 2005 Stock Option Plan, pursuant to a written agreement (the
        "Agreement"). The option terminates five (5) years from the date of grant.
        Per
        the Agreement, option shall become exercisable during the term that Optionee
        serves as a Director of the Company as follows: (i) 50% of the shares of
        Stock
        subject to this Option became exercisable immediately as of the date of this
        Agreement; and (ii) the balance of the shares of Stock subject to this Option
        shall become exercisable in eight (8) equal quarterly installments of three
        thousand one hundred twenty five (3,125) shares of Stock subject to this
        Option,
        the first installment to be exercisable as of the last day of the first quarter
        of calendar year 2005, with an additional 3,125 of such Shares becoming
        exercisable as of the last day of each subsequent quarter. The Company granted
        to Optionee the right to purchase the number of shares of Stock set forth
        in the
        Agreement, for cash (or other consideration as is authorized under the Plan
        and
        acceptable to the Board of Directors of the Company, in their sole and absolute
        discretion) at $3.10 per share (the "Exercise Price"), such price being not
        less
        than eighty-five percent (85%) of the fair market value per share of the
        Shares
        covered by this Option as of the date of the Agreement. The options were
        valued
        using the Black-Scholes option pricing model using the following assumptions:
        Volatility 66%; risk free interest rate 4.13%, dividend yield of 0% and expected
        term of 5 years.





On
      September 26, 2005, the Company granted options (the “Options”) to purchase
      250,000 shares of the Company's common stock (the “Common Stock”) at an exercise
      price $3.93 per share, the closing price on September 23, 2005. One-fifth (1/5)
      of the Options (50,000 shares) have been vested immediately. The remaining
      Options shall vest over a 3-year period, with 13.33 % (33,333 shares) vesting
      on
      the 180th day of the Effective Date and the balance vesting thereafter on a
      semi-annual basis, proportionately over the course of the following three (3)
      years. The options were valued using the Black-Scholes option pricing model
      using the following assumptions: Volatility 66%; risk free interest rate 4.13%,
      dividend yield of 0% and expected term of 3 years.





During
      the six month period ended June 30, 2006, the Company issued 480,000 options
      to
      employees and 20,000 options to two directors. The options vest over a period
      of
      three years and have a life of 5 years. The Company recorded $198,000 of
      compensation based on the fair value method under FAS 123R using the following
      assumptions: Volatility of 66%, risk free interest rate of 4.13%, dividend
      yield
      of 0% and expected life of 5 years. No estimate of forfeitures was made as
      the
      Company has a short history of granting options.





The
      Company adopted SFAS No. 123-R effective January 1, 2006 using the
      modified prospective method. Under this transition method, stock compensation
      expense recognized in the six month period ended June 30, 2006 includes
      compensation expense for all stock-based compensation awards granted on or
      after
      January 1, 2006, based on the grant date fair value estimated in accordance
      with the provisions of SFAS No. 123-R and the fair value of options
      granted before January 1, 2006 that have vested during the six month period
      ended June 30, 2006.





Prior
      to
      January 1, 2006, the Company measured stock compensation expense using the
      intrinsic value method of accounting in accordance with Accounting Principles
      Board (APB) Opinion No. 25, “Accounting
      for
      Stock Issued to Employees,” and related interpretations (APB No. 25). Thus,
      expense was generally not recognized for the Company’s employee stock option and
      purchase plans.




-
          13
          -




Following
      is a summary of the stock option activity:





**Options**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding,
                December 31, 2005
            
            
            400,000
            
            $
            3.55
            
            $
            1,818,409Granted
            
            
            500,000
            
            $
            8.10
            
            $
            1,450,000Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding,
                June 30, 2006
            
            
            900,000
            
            $
            5.20
            
            $
            5,219,022





Following
      is a summary of the status of options outstanding at June 30, 2006:





**Outstanding
                Options**
            
            **Exercisable
                Options********Exercise**
              **Price**
            **Number**
            **Average
                Remaining**
              **Contractual
                Life**
            **Average
                Exercise**
              **Price**
            **Number**
            **Average**
              **Exercise
                Price**$3.10
            150,000
            3.59
            $3.10
            131,250
            $3.10$3.93
            250,000
            2.24
            $3.93
            83,333
            $3.93$8.10
            500,000
            4.60
            $8.10
            69,444
            $8.10





**Impact
      of adoption of SFAS No. 123-R in 2006**





Stock
      compensation expense measured in accordance with SFAS No. 123-R totaled
      approximately $330,000 or $ 0.02 per basic and diluted share in the six month
      period ended June 30, 2006. The adoption of SFAS No. 123-R resulted in
      increased expense of approximately $330,000 as compared to the stock
      compensation expense that would have been recorded pursuant to APB No. 25.
      In the six month period ended June 30, 2005, no expense was recorded as the
      Company did not have any stock options awarded during that period that had
      material intrinsic value.  Had the fair value method been adopted during
      the six month period ended June 30, 2005, pro forma net income and earnings
      per
      share would have been as follows: ($ in thousands, except per share
      amounts):





**Six
                month period ended**
              **June
                30, 2005**Net
                Income - as reported
            $4,300Stock-Based
                employee compensation expense included in reported net income, net
                of
                tax
            -Total
                stock-based employee compensation under fair-value-based method for
                all
                rewards, net of tax
            (182)Pro
                forma net income
            $4,118




Earnings
                per share:
            **Six
                month period
                ended**
              **June
                30, 2005**Basic,
                as reported
            $0.29Diluted,
                as reported
            $0.28Basic,
                pro forma
            $0.27Diluted,
                pro forma
            $0.27




**Methods
      of estimating fair value**





Under
      both SFAS No. 123-R and under the fair value method of accounting under
      SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of
      restricted stock is determined based on the number of shares granted and the
      quoted price of the Company’s common stock on the date of grant. The fair value
      of stock options is determined using the Black-Scholes model.




-
          14
          -




**Significant
      assumptions used to estimate fair value**





Under
      SFAS No 123-R, the Company’s expected volatility assumption is based on the
      historical volatility of Company’s stock. The expected life assumption is
      primarily based on historical exercise patterns and employee post-vesting
      termination behavior. The risk-free interest rate for the expected term of
      the
      option is based on the U.S. Treasury yield curve in effect at the time of grant.





Stock
      compensation expense recognized in the first quarter of 2006 is based on awards
      expected to vest, and there were no estimated forfeitures as the Company has
      a
      short history of issuing options. SFAS No. 123-R requires forfeitures to be
      estimated at the time of grant and revised in subsequent periods, if necessary,
      if actual forfeitures differ from those estimates.





**8. SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS**





The
      Company prepares its statements of cash flows using the indirect method as
      defined under the Financial Accounting Standard No. 95.





The
      Company paid $0 for interest and income tax during the six month periods ended
      June 30, 2006 and 2005.





**9. STATUTORY
      COMMON WELFARE FUND**





As
      stipulated by the Company Law of the People’s Republic of China (PRC), net
      income after taxation can only be distributed as dividends after appropriation
      has been made for the following:




(i)
            Making
                up cumulative prior years’ losses, if
                any;





(ii)
            Allocations
                to the “Statutory surplus reserve” of at least 10% of income after tax, as
                determined under PRC accounting rules and regulations, until the
                fund
                amounts to 50% of the Company's registered capital;





(iii)
            Allocations
                of 5-10% of income after tax, as determined under PRC accounting
                rules and
                regulations, to the Company's “Statutory common welfare fund”, which is
                established for the purpose of providing employee facilities and
                other
                collective benefits to the Company's employees; and





(iv)
            Allocations
                to the discretionary surplus reserve, if approved in the shareholders’
                general meeting.





The
      Company established a reserve for the annual contribution of 5% of net income
      to
      the welfare fund. Statutory common welfare fund amounted to $989,187 and
      $327,283, as of June 30, 2006 and 2005, respectively.





**10.STATUTORY
      RESERVE**





In
      accordance with the Chinese Company Law (note 9), the Company has allocated
      10%
      of its annual net income, as statutory surplus reserve. Statutory surplus
      reserve amounted to $1,978,373 and $664,483, as of June 30, 2006 and 2005,
      respectively.





The
      Statutory surplus reserve and statutory common welfare fund are aggregated
      on
      the balance sheet as Statutory Reserve.





**11.EMPLOYEE
      PENSION**





The
      employee pension in Harbin generally includes two parts: The first part to
      be
      paid by the Company is 20% of the employees’ actual salary in the prior year. If
      the average salary falls below $1,165 for each individual, $1,165 will be used
      as the basis. The other part paid by the employees is 8% of actual salary with
      the same minimum requirement. The Company made no contributions of employment
      benefits, including pension in the six month period ended June 30, 2005. The
      Company made $ 10,767 in contributions of employment benefits, including pension
      in the six month period ended June 30, 2006.




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          15
          -




**12.EARNINGS
      PER SHARE**





Earnings
      per share for six month periods ended June 30, 2006 and 2005 were determined
      by
      dividing net income for the periods by the weighted average number of both
      basic
      and diluted shares of common stock and common stock equivalents outstanding.





The
      following is an analysis of the differences between basic and diluted earnings
      per common share in accordance with Statement of Financial Accounting Standards
      No. 128, “Earnings Per Share.”





**For
                the six month**
              **periods
                ended June 30****2006**
            **2005**Basic
                weighted average common shares outstanding
            16,600,451
            15,000,450Effect
                of dilutive securities:
              Stock
                options
            645,084
            125,138Diluted
                weighted average common shares
              outstanding
            17,245,535
            15,125,588





**13.CURRENT
      VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**





The
      Company's operations are carried out in the PRC. Accordingly, the Company's
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environments in the PRC, and by the general state
      of the PRC's economy.





The
      Company's operations in the PRC are subject to specific considerations and
      significant risks not typically associated with companies in the North America
      and Western Europe. These include risks associated with, among others, the
      political, economic and legal environments and foreign currency exchange. The
      Company's results may be adversely affected by changes in governmental policies
      with respect to laws and regulations, anti-inflationary measures, currency
      conversion and remittance abroad, and rates and methods of taxation, among
      other
      things.




**14.** **** **RECLASSIFICATIONS**
 
 Certain
        prior period amounts have been reclassified to conform to the six month periods
        ended June 30, 2006 presentation.
 
 **15.** **** **LEGAL
        PROCEEDINGS**
 
 From
        time
        to time, the Company become involved in various lawsuits and legal proceedings
        which arise in the ordinary course of business.
  Following
        is the summary of the current litigation as of June 30, 2006.
  Leong
        Sing Lye v. Harbin Electric, Inc. United States District Court, District
        of
        Nevada, Case No. 2:06-CV-00796
  In
        June
        2006 Leong Sing Lye ("Lye") filed a complaint against the Company seeking
        specific performance and related relief arising of a so called Appointment
        Agreement. Pursuant to this action Lye claims to have been appointed as the
        Company's Consultant of Corporate Strategy. The Company has filed an answer
        to
        Lye's Complaint denying the material allegations thereof and a counterclaim
        against Lye for fraud and related claims.
  No
        discovery has yet been conducted and the case is in its very preliminary
        stages.
        The Company intends to defend against Lye's Complaint and pursue its
        Counterclaim.
  **16.** **** **SUBSEQUENT
        EVENTS**




On
      August
      2, 2006, the Company, Citadel Equity Fund Ltd. (“Citadel”) and Merrill Lynch
      International (“Merrill Lynch” and, together with Citadel, the “Investors”)
      entered into an indicative financing term sheet dated as of August 2, 2006
      (the
“Term Sheet”). The Term Sheet relates to the proposed issuance of Senior Secured
      Notes in an aggregate principal amount of $50 million (the “Notes”).




As
      set
      forth in the Term Sheet, Citadel intends to subscribe to $38.0 million of the
      principal amount of the Notes, with such Notes having a maturity date that
      is
      six years from the date of issue (the “2012 Notes”), and Merrill Lynch intends
      to subscribe to $12 million of the principal amount of the Notes, with such
      Notes having a maturity date that is four years from the date of issue (the
      “2010 Notes”). The 2010 Notes and the 2012 Notes will each be issued under an
      indenture to be entered into among the Company, Advanced Electric Motors, Inc.,
      a wholly-owned subsidiary of the Company, as guarantor, and a trustee for the
      Notes.




The
      Term
      Sheet also provides that, concurrent with the issuance of the Notes, the Company
      shall grant to (a) Merrill Lynch fully detachable warrants on the Company’s
      common stock with a maturity date that is three years from the date of issuance
      of the Notes and (b) Citadel fully detachable warrants on the Company’s common
      stock with a maturity that is six years from the date of issuance of the Notes
      (collectively, the “Warrants”). The Warrants are to be exercisable at the option
      of the Warrant holders beginning on the date of issuance through the maturity
      date of each Warrant. In connection with the issuance of the Warrants, the
      Company has agreed to file a shelf registration statement covering the resale
      of
      the shares underlying the Warrants.




-
          16
          -




Under
      the
      Term Sheet, any failure by the Company to perform or consummate its obligations
      or agreements, or any breach by the Company of its obligations, under the Term
      Sheet shall result in the Company being liable to pay a cash break-up fee equal
      to 7.5% of the principal amount of the Notes within seven days of the date
      of
      the breach of obligation or failure to perform.





The
      respective obligations of the Company to issue and the Investors to purchase
      the
      Notes are subject to the conditions set forth in the Term Sheet, including
      the
      execution of definitive legal documentation and satisfactory completion by
      the
      Investors of their due diligence investigation.




-
          17
          -




**Item
      1A. Risk Factors**




You
      should carefully consider these risk factors as each of these risks could
      adversely affect our business, operating results and financial condition.
      Additional risks and uncertainties not presently foreseeable to us may also
      impair our business operations. If any of the following risks actually occurs,
      our business, financial condition or operating results could be materially
      and
      adversely affected.




**GENERAL
      RISKS RELATING TO OUR BUSINESS**




**Our
      management owns a significant amount of our common stock, giving them influence
      or control in corporate transactions and other matters, and their interests
      could differ from those of other stockholders.**




As
      of
      August 14, 2006, our principal executive officers, Tianfu Yang, Tianli Yang,
      Suofei Xu, and Zedong Xu, beneficially owned approximately 68.7% of our
      outstanding common stock. As a result, they are in a position to significantly
      influence or control the outcome of matters requiring stockholders’ vote,
      including the election of directors, the adoption of any amendment to our
      certificate of incorporation or bylaws, and the approval of significant
      corporate transactions. Their control may delay or prevent a change of control
      on terms favorable to our other stockholders and may adversely affect the voting
      and other rights of our other stockholders.




**We
      need to manage growth in operations to maximize our potential growth and
      achieve our expected revenues.**




In
      order
      to maximize potential growth in our current and potential markets, we believe
      that we must expand our manufacturing and marketing operations. We experience
      growth in our revenues of over three hundred eighty-seven percent (387%) over
      the last year (when comparing our revenues in 2005 to those in 2004); however,
      there can be no assurance that we will be able to maintain such growth or any
      growth of our business. To fund our anticipated expansion, we need an increased
      amount of working capital. This expansion will place a significant strain on
      our
      management and our operational, accounting, and information systems. We expect
      that we will need to continue to improve our financial controls, operating
      procedures, and management information systems. We will also need to effectively
      train, motivate, and manage our employees. Our failure to manage our growth
      could disrupt our operations and ultimately prevent us from generating the
      revenues we expect.




**We
      may require additional financing in the future and a failure to obtain such
      required financing will inhibit our ability to grow.**




The
      continued growth of our business may require additional funding from time to
      time. Funding would be used for general corporate purposes. General corporate
      purposes may include acquisitions, investments, repayment of debt, capital
      expenditures, repurchase of our capital stock and any other purposes that we
      may
      specify in any prospectus supplement. Obtaining additional funding would be
      subject to a number of factors including market conditions, operational
      performance and investor sentiment, many of which are outside of our control.
      These factors may make the timing, amount, terms and conditions of additional
      funding unattractive, or unavailable, to us.




**We
      may not be able to adequately protect and maintain our intellectual
      property.**




Our
      success will depend on our ability to continue to develop and market linear
      motors and other motor products. While we have been granted three patents in
      China relating to linear motor applications, we currently have not applied
      for
      patents for our technical processes and designs, as we believe an application
      for such patents would result in public knowledge of our proprietary technology
      and designs.




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          18
          -




**Because
      of our dependence on a few key customers, the loss of any key customer could
      cause a significant decline in our revenues.**




Four
      major customers accounted for 81% of the net revenue for the six-month period
      ended June 30, 2006. The loss of any of our major customers, or a significant
      reduction in sales to any such customers, would adversely affect our
      revenues.




**We
      depend on the supply of raw materials, and any adverse changes in such supply
      or
      the costs of raw materials may adversely affect our
      operations.**




Four
      vendors provided 86% of our purchase of raw materials for the six-month period
      ended June 30, 2006. We currently obtain most of our raw materials from Acheng
      Relay Company Limited, Jiangnan Aluminum Material Factory and Linear Motor
      Institute of the Zhejiang University and Rui’an Fangzhuang Motor Fittings
      Factory. Any material change in the spot and forward rates could have a material
      adverse effect on the cost of our raw materials and on our operations. In
      addition, if we need alternative sources for key component parts for any reason,
      these component parts may not be immediately available to us. If alternative
      suppliers are not immediately available, we will have to identify and qualify
      alternative suppliers, and production of these components may be delayed. We
      may
      not be able to find an adequate alternative supplier in a reasonable time
      period, or on commercially acceptable terms, if at all. Shipments of affected
      products have been limited or delayed as a result of such problems in the past,
      and similar problems could occur in the future. Our inability to obtain our
      key
      source supplies for the manufacture of our products may require us to delay
      shipments of products, harm customer relationships or force us to curtail or
      cease operations.




**Our
      success depends on our management team and other key personnel, the loss of
      any
      of whom could disrupt our business operations.**




Our
      future success will depend in substantial part on the continued service of
      our
      senior management, including Mr. Tianfu Yang, our Chairman and Chief Executive
      Officer, Mr. Xu Suofei, our Vice President and Board Member, Mr. Tianli Yang,
      our Vice President, and Mr. Zedong Xu, our Chief Financial Officer. The loss
      of
      the services of one or more of our key personnel could impede implementation
      of
      our business plan and result in reduced profitability. We do not carry key
      person life insurance on any of our officers or employees. Our future success
      will also depend on the continued ability to attract, retain and motivate highly
      qualified technical sales and marketing customer support.




Because
      of the rapid growth of the economy in China, competition for qualified personnel
      is intense. We cannot assure you that we will be able to retain our key
      personnel or that we will be able to attract, assimilate or retain qualified
      personnel in the future.




**Our
      directors and officers control a majority of our common stock and, as a result,
      they may exercise voting control.**




Our
      directors and executive officers, directly or through entities that they
      control, currently beneficially own, as a group, approximately 68.9% of our
      issued and outstanding common stock as of August 14, 2006. This significant
      concentration of share ownership may adversely affect the trading price of
      our
      common stock because investors often perceive a disadvantage in owning shares
      in
      a company with just one or several controlling stockholders. Furthermore, our
      directors and officers, as a group, has the ability to control the outcome
      of
      all matters requiring stockholder approval, including the election of directors
      and approval of significant corporate transactions, such as mergers,
      consolidations or the sale of substantially all of our assets. This
      concentration of ownership may have the effect of delaying or preventing a
      change of control, including a merger, consolidation or other business
      combination involving us, or discouraging a potential acquirer from making
      a
      tender offer or otherwise attempting to obtain control.




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          19
          -


**RISKS
      RELATING TO DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF
      CHINA**




**China’s
      economic policies could adversely affect our business.**




Substantially
      all of our assets are located in China and substantially all of our revenue
      is
      derived from our operations in China. Accordingly, our results of operations
      and
      prospects are subject, to a significant extent, to the economic, political
      and
      legal developments in China.




While
      China’s economy has experienced a significant growth in the past twenty years,
      growth has been uneven, both geographically and among various sectors of the
      economy. The Chinese government has implemented various measures to encourage
      economic growth and guide the allocation of resources. Some of these measures
      benefit the overall economy of China, but may also have a negative effect on
      us.
      For example, our operating results and financial condition may be adversely
      affected by the government control over capital investments or changes in tax
      regulations.




The
      economy of China has been transitioning from a planned economy to a more
      market-oriented economy. In recent years the Chinese government has implemented
      measures emphasizing the utilization of market forces for economic reform and
      the reduction of state ownership of productive assets and the establishment
      of
      corporate governance in business enterprises; however, a substantial portion
      of
      productive assets in China are still owned by the Chinese government. In
      addition, the Chinese government continues to play a significant role in
      regulating industry development by imposing industrial policies. It also
      exercises significant control over China’s economic growth through the
      allocation of resources, controlling payment of foreign currency-denominated
      obligations, setting monetary policy and providing preferential treatment to
      particular industries or companies.




**Capital
      outflow policies in the People’s Republic of China may hamper our ability to
      remit income to the United States.**




The
      PRC
      has adopted currency and capital transfer regulations. These regulations may
      require that we comply with complex regulations for the movement of capital.
      Although we believe that we are currently in compliance with these regulations,
      should these regulations or the interpretation of them by courts or regulatory
      agencies change we may not be able to remit all income earned and proceeds
      received in connection with our operations or from the sale of our operating
      subsidiary to the United States or to our stockholders.




**If
      preferential tax concessions granted by the PRC government are changed or
      expire, our financial results and results of operations would be materially
      and
      adversely.**




Our
      results of operation may be adversely affected by changes to or expiration
      of
      preferential tax concessions that our subsidiary in the PRC currently enjoys.
      The statutory tax rate generally applicable to domestic Chinese companies is
      33%. A reduced income tax rate of 15% may be possible for productive foreign
      investment enterprises in the Economic and Technological Development Zones
      and
      for enterprises engaged in production or business operations in the Special
      Economic Zones. As a result of preferential tax rate incentives, our operations
      have been subject to relatively low tax liabilities. Tax that would otherwise
      have been payable without preferential tax treatment amounted to approximately
      $0.34 million and $1.5 million in 2004 and 2005, respectively.




Tax
      laws
      in China are subject to interpretations by relevant tax authorities. The
      preferential tax treatment may not remain in effect or may change, in which
      case
      we may be required to pay the higher income tax rate generally applicable to
      Chinese companies, or such other rate as is required by the laws of
      China.




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          20
          -


**Fluctuations
      in the value of the RMB could materially affect our financial condition and
      results of operations.**




The
      value
      of the RMB against the U.S. dollar and other currencies may fluctuate and is
      affected by, among other things, changes in the PRC's political and economic
      conditions. As the majority of our net revenue is denominated in RMB, any
      significant revaluation of the RMB may materially and adversely affect our
      cash
      flows, revenues and financial condition. For example, to the extent that we
      need
      to convert U.S. dollars we receive from an offering of our securities into
      RMB
      for our operations, appreciation of the RMB against the U.S. dollar could have
      a
      material adverse effect on our business, financial condition and results of
      operations. Conversely, if we decide to convert our RMB into U.S. dollars for
      the purpose of making payments for business purposes and the U.S. dollar
      appreciates against the RMB, the U.S. dollar equivalent of the RMB we convert
      would be reduced. In addition, the depreciation of significant U.S. dollar
      denominated assets could result in a charge to our income statement and a
      reduction in the value of these assets.




On
      July
      21, 2005, the PRC government changed its policy of tying the value of the RMB
      to
      the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within
      a narrow and managed band against a basket of certain foreign currencies. This
      change in policy has resulted in an approximately 2.0% appreciation of the
      RMB
      against the U.S. dollar. While the international reaction to the RMB revaluation
      generally has been positive, there remains significant international pressure
      on
      the PRC government to adopt an even more flexible currency policy, which could
      result in a further and more significant appreciation of the RMB against the
      U.S. dollar.




**We
      may experience currency fluctuation and longer exchange rate payment
      cycles.**




The
      local
      currencies in the countries in which we sell our products may fluctuate in
      value
      in relation to other currencies. Such fluctuations may affect the costs of
      our
      products sold and the value of our local currency profits. While we are not
      conducting any meaningful operations in countries other than China at the
      present time, we may expand to other countries and may then have an increased
      risk of exposure of our business to currency fluctuation.




**We
      may face obstacles from the Communist system in the PRC.**




Foreign
      companies conducting operations in the PRC face significant political, economic
      and legal risks. The Communist regime in the PRC, including a stifling
      bureaucracy, may hinder Western investment.




**We
      may have difficulty establishing adequate management, legal and financial
      controls in the PRC.**




The
      PRC
      historically has been deficient in Western style management and financial
      reporting concepts and practices, as well as in modern banking, computer and
      other control systems. We may have difficulty in hiring and retaining a
      sufficient number of qualified employees to work in the PRC. As a result of
      these factors, we may experience difficulty in establishing management, legal
      and financial controls, collecting financial data and preparing financial
      statements, books of account and corporate records and instituting business
      practices that meet Western standards.




**It
      will be extremely difficult to acquire jurisdiction and enforce liabilities
      against our officers, directors and assets based in the
      PRC.**




Because
      our executive officers and several of our directors, including our chairman
      of
      the Board of Directors, are Chinese citizens, it may be difficult, if not
      impossible, to acquire jurisdiction over these persons in the event a lawsuit
      is
      initiated against us and/or our officers and directors by a stockholder or
      group
      of stockholders in the United States. Also, because the majority of our assets
      are located in the PRC, it would also be extremely difficult to access those
      assets to satisfy an award entered against us in U.S. court.




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          21
          -


**The
      legal system in China has inherent uncertainties that may limit the legal
      protections available in the event of any claims or disputes with third
      parties.**




The
      legal
      system in China is based on written statutes. Prior court decisions may be
      cited
      for reference but have limited precedential value. Since 1979, the central
      government has promulgated laws and regulations dealing with economic matters
      such as foreign investment, corporate organization and governance, commerce,
      taxation and trade. As China’s foreign investment laws and regulations are
      relatively new and the legal system is still evolving, the interpretation of
      many laws, regulations and rules is not always uniform and enforcement of these
      laws, regulations and rules involve uncertainties, which may limit the remedies
      available in the event of any claims or disputes with third parties. In
      addition, any litigation in China may be protracted and result in substantial
      costs and diversion of resources and management attention.




**We
      may face political and/or judicial corruption in the PRC.**




Another
      obstacle to foreign investment is corruption. There is no assurance that we
      will
      be able to obtain recourse, if desired, through the PRC’s poorly developed and
      often corrupt judicial systems.




Most
      of
      our assets are located in China, any dividends of proceeds from liquidation
      is
      subject to the approval of the relevant Chinese government agencies.




-
          22
          -


**Item
      2.**  **Management’s
      Discussion and Analysis or Plan of Operation**




**INFORMATION
      REGARDING FORWARD LOOKING STATEMENTS**




The
      following discussion should be read in conjunction with the unaudited condensed
      consolidated financial statements and notes thereto set forth in Item 1 of
      this
      Quarterly Report. In addition to historical information, this discussion and
      analysis contains forward-looking statements that relate to future events and
      expectations and, as such, constitute forward-looking statements.
      Forward-looking statements include those containing such words as” anticipates,”
“believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” will,” “will
      likely result,” “forecast,” “outlook,” “projects” or similar expressions. Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors that may cause actual results, performance or achievements of
      the
      Company to be materially different from those expressed or implied in the
      forward-looking statements.




**OVERVIEW**




We
      were
      incorporated under the laws of the state of Nevada and, along with our
      wholly-owned subsidiaries, are headquartered in Harbin, China. We manufacture,
      design, supply and service linear motors and special motors for domestic China
      and other international markets. Our products are purchased by a broad range
      of
      customers, including those involved in oil services, factory automation,
      packaging and mass transportation systems.




Our
      expenses have consisted primarily of those incurred with sales and marketing
      of
      our products, general and administrative costs associated with our operations
      and costs of maintaining our facilities, salaries and research and development.
      To date, we have funded our operations primarily through the sale of equity
      securities and retained earnings.




We
      are
      subject to risks common to companies operating in China, including risks
      inherent in our distribution and commercialization efforts, uncertainty of
      foreign regulatory and marketing approvals and laws, reliance on key customers,
      enforcement of patent and proprietary rights, the need for future capital and
      retention of key employees. We cannot provide assurance that we will generate
      revenues or achieve and sustain profitability in the future.




**ACCOUNTING
      POLICIES AND ESTIMATES**




We
      believe that the application of the following accounting policies, which are
      important to our financial position and results of operations, requires
      significant judgments and estimates on the part of management. For a summary
      of
      our significant accounting policies, see Note 2 of the consolidated
      financial statements appearing elsewhere in this Quarterly Report.




**Accounts
      Receivable**




We
      maintain reserves for potential credit losses on accounts receivable. Management
      reviews the composition of accounts receivable and analyze historical bad debts,
      customer concentrations, customer credit worthiness, current economic trends
      and
      changes in customer payment patterns to evaluate the adequacy of these
      reserves.




We
      use
      estimates in determining our allowance for bad debts that are based on our
      historical collection experience, current trends, credit policy and a percentage
      of our accounts receivable by aging category. In determining these percentages,
      we review historical write-offs in our receivables. In determining the
      appropriate reserve percentages, we also review current trends in the credit
      quality of our customers, as well as changes in our internal credit policies.
      We
      maintain reserves for potential credit losses on accounts receivable. Management
      reviews the composition of accounts receivable and analyzes historical bad
      debts, customer concentrations, customer credit worthiness, current economic
      trends and changes in customer payment patterns to evaluate the adequacy of
      these reserves. Reserves are recorded primarily on a specific identification
      basis. Additional allowances for doubtful accounts may be required if there
      is
      deterioration in past due balances, if economic conditions are less favorable
      than anticipated, or for customer-specific circumstances, such as financial
      difficulty.




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          23
          -


Reserves
      are recorded primarily on a specific identification basis. Reserve for potential
      credit losses were $0, $29,249 and $30,000 for the
      years ended December 31, 2004 and 2005 and for the six
      months ended June 30 ,
      2006,
      respectively. No amounts were written off during the periods indicated. If
      our
      estimate of our allowance is understated in future periods, operating income
      would be reduced.




**Inventories**




Inventory
      levels are based on projections of future demand and market conditions.
      Inventories are stated at cost, which is not in excess of market using the
      weighted average cost method. Any sudden decline in demand and/or rapid product
      improvements and technological changes can result in excess and/or obsolete
      inventories. Because most of our products are customized and unique to a
      particular customer, there is a risk that we will forecast inventory needs
      incorrectly and purchase or produce excess inventory. As a result, actual demand
      may differ from forecasts, and such differences, if not managed, may have a
      material adverse effect on future results of operations due to required
      write-offs of excess or obsolete inventory. To mitigate against such exposure,
      we require a binding purchase order or a signed agreement by our customer
      agreeing to pay for and take possession of finished goods inventory parts for
      the duration of the agreement.




On
      an
      ongoing basis, inventories are reviewed for potential write down for estimated
      obsolescence or unmarketable inventories equal to the difference between the
      costs of inventories and the estimated net realizable value based upon forecasts
      for future demand and market conditions. We have experienced no inventory write
      downs since our inception. Accordingly, we have not created any reserve for
      obsolete inventory consistent with our historical experience. To the extent
      we
      increase our reserves for future periods, operating income will be
      reduced.




**Revenue
      Recognition**




Our
      revenue recognition policies are structured to comply with Staff Accounting
      Bulletin (SAB) 104 and SFAS 48. SAB 104 requires that revenue can only be
      recognized when it is realized or realizable and earned. Revenue generally
      is
      realized or realizable and earned when all four of the following criteria have
      been met: (1) persuasive evidence of an arrangement exists; (2) delivery has
      occurred or services rendered; (3) the price is fixed and determinable; and
      (4)
      collectability is reasonably assured.




Determination
      of criterion (4) is based on our judgments regarding the collectability of
      those
      amounts. Historically, we have not encountered any significant problems with
      collectability and thus have determined that it is not necessary to defer
      revenue recognition on that basis. Should changes in conditions cause us to
      determine this criterion is not met for certain future transactions, revenues
      for any reporting period could be adversely affected by delaying recognition
      of
      such revenues.




In
      addition, our revenue recognition could be negatively impacted by returns.
      However, we make custom products which are customer specific, and no returns
      are
      allowed. We warrant our product for repair only in the event of defects for
      two
      years from the date of shipment. Historically, we have not experienced
      significant defects, and replacements for defects have not been material. We
      charge such costs to cost of goods sold. For the years ended December 31, 2004
      and 2005 and for the six
      months ended June 30 ,
      2006,
      such returns and allowances were $0, $0 and $ 0, respectively.
      Should returns increase in the future it would be necessary to adjust our
      estimates, in which case recognition of revenues could be
      delayed.


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          24
          -


**Stock-Based
      Compensation**




Prior
      to
      January 1, 2006, we accounted for share-based employee compensation plans
      using the intrinsic value method of accounting in accordance with APB 25. Under
      the provisions of APB 25, no compensation expense is recognized when stock
      options are granted with exercise prices equal to or greater than market value
      on the date of grant.




Effective
      January 1, 2006, the Company accounts for stock-based compensation in accordance
      with the fair value recognition provisions of SFAS 123R. The Company uses the
      Black-Scholes-Merton option-pricing model which requires the input of highly
      subjective assumptions. These assumptions include estimating the length of
      time
      employees will retain their stock options before exercising them (“expected
      term”), the estimated volatility of the Company’s common stock price over the
      expected term and the number of options that will ultimately not complete their
      vesting requirements (“forfeitures”). Changes in the subjective assumptions can
      materially affect the estimate of fair value of stock-based compensation and
      consequently, the related amount recognized on the consolidated statements
      of
      earnings.




**RESULTS
      OF OPERATIONS**




**SIX
      MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30,
      2005**




**Revenue**




For
      the
      six month period ended June 30, 2006, we generated net revenues of $18,590,003.
      During the six month period ended June 30, 2005, we produced net revenues of
      $9,402,739. Sales of linear motor and special motor products drove the growth
      in
      the period. Industrial electric linear motors and special motors continued
      to
      comprise significantly all of our total product sales in both comparable
      periods. The increase for the six -month period ended June 30, 2006 was due
      to
      the Company’s success in recruiting new customers and increased sales to our
      existing customers.




**Gross
      Profit**




The
      Company achieved a gross profit of $9,074,527 for the six months ended June
      30,
      2006 compared to $4,804,659 for the six months ended June 30, 2005. The increase
      is directly related to our increases in sales and mix of product. Gross margin,
      as a percentage of revenues, was 48.8% for the six months ended June 30, 2006
      compared to 51.1% for the six months ended June 30, 2005. The change in gross
      margin is normal as it reflects the different mix of products shipped in their
      corresponding periods.




**Operating
      Expenses**




Our
      total
      operating expenses consist of costs associated with sales and marketing,
      research and development expenditures, general administrative costs, and amounts
      to account for stock-based compensation. The Company incurred total operating
      expenses of $2,257,607, or 12.1% of sales, for the six months ended June 30,
      2006. This represents an increase of $1,739,273 compared to $518,334, or 5.5%
      of
      sales for the six months ended June 30, 2005. Aggregated selling expenses of
      $424,606, or 2.3% of sales, account for expenses associated with sales and
      marketing of the Company’s products. Selling expenses for the corresponding
      period last year were $124,333 or 1.3% of sales. The increase is due to our
      increased revenues and sales activity. General and administrative expenses
      include the costs of maintaining the Company’s facilities, salaries, research
      and development, and amounts allocated to stock based compensation through
      options grants. General and administrative expenses for the six months ended
      June 30, 2006 were $1,833,000, or 9.9% of sales, compared to $394,001, or 4.2%
      of sales in June 30, 2005. The increases were due to the inclusion of
      stock-based compensation expense and administrative expenses to support the
      opening of our new offices in the U.S. Excluding the stock-based compensation
      of
      $330,000, our General and administrative expenses for the six months ended
      June
      30, 2006 were $1,503,000, or 8.1% of sales versus $394,001, or 4.2% of sales
      in
      June 30, 2005. There was no stock-based compensation charge in the corresponding
      period last year.




Stock
      compensation expense measured in accordance with SFAS No. 123-R totaled
      approximately $330,000, or $ 0.02 per basic and diluted share, in the six month
      period ended June 30, 2006. The adoption of SFAS No. 123-R resulted in
      increased expense of approximately $330,000, or 1.8% of sales. In the six month
      period ended June 30, 2005, no expense was recorded as the Company did not
      have
      any stock options awarded during that period that had intrinsic
      value.




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          25
          -




**Net
      Income**




The
      Company's net income was $7,472,241, or 40.2% of sales, for the six month period
      ended June 30, 2006, compared to $4,300,443, or 45.7% of sales, for the six
      month period ended June 30, 2005. The increase is attributed to the continued
      increase in sales levels and the contribution from the sale of our marketable
      securities. The Company sold its marketable securities in the six month period
      ended June 30, 2006 at a realized gain of $571,143. No other sales of marketable
      securities occurred during the six month period ended June 30, 2006. Excluding
      the realized gain from the sale of marketable securities our net income was
      $6,901,098, or 37.1% of sales.




**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      June 30, 2006, the Company had $11,494,797 cash and cash equivalents. The
      Company had net cash flows provided by operations of $4,758,783 for the six
      month period ended June 30, 2006, as compared to net cash provided by operations
      of $1,727,414 in the corresponding period last year. The change in net cash
      flows from operations in the current period as compared to the corresponding
      period last year was mainly due to net income. Cash flows from investing
      activities contributed $917,583 in the six month period ended June 30, 2006
      compared with a net usage of $477,088 in the corresponding period last year.
      The
      contribution in the current period was mainly due to the proceeds from the
      sale
      of marketable securities. The Company had a net increase in cash and cash
      equivalent of $5,755,778 in the current period as compared to a net increase
      of
      $1,543,995 in the corresponding period last year. Our net increase in cash
&
cash equivalents during the six month period ended June 30, 2006 was due mainly
      to the increased cash flow from operations.




On
      August
      2, 2006, the Company, Citadel Equity Fund Ltd. (“Citadel”) and Merrill Lynch
      International (“Merrill Lynch” and, together with Citadel, the “Investors”)
      entered into an indicative financing term sheet dated as of August 2, 2006
      (the
“Term Sheet”). The Term Sheet relates to the proposed issuance of Senior Secured
      Notes in an aggregate principal amount of $50 million (the “Notes”). The Term
      Sheet also provides that, concurrent with the issuance of the Notes, the Company
      shall grant to (a) Merrill Lynch fully detachable warrants on the Company’s
      common stock with a maturity date that is three years from the date of issuance
      of the Notes and (b) Citadel fully detachable warrants on the Company’s common
      stock with a maturity that is six years from the date of issuance of the Notes
      (collectively, the “Warrants”). The Warrants are to be exercisable at the option
      of the Warrant holders beginning on the date of issuance through the maturity
      date of each Warrant. Under the Term Sheet, any failure by the Company to
      perform or consummate its obligations or agreements, or any breach by the
      Company of its obligations, under the Term Sheet shall result in the Company
      being liable to pay a cash break-up fee equal to 7.5% of the principal amount
      of
      the Notes within seven days of the date of the breach of obligation or failure
      to perform. The respective obligations of the Company to issue and the Investors
      to purchase the Notes are subject to the conditions set forth in the Term Sheet,
      including the execution of definitive legal documentation and satisfactory
      completion by the Investors of their due diligence investigation. See Note
      15 of
      Notes to the Consolidated Financial Statements.




The
      majority of the Company's revenues and expenses were denominated primarily
      in
      Renminbi (“RMB”), the currency of the People's Republic of China. There is no
      assurance that exchange rates between the RMB and the U.S. dollar will remain
      stable. A revaluation of the RMB relative to the U.S. dollar could adversely
      affect our business, financial condition and results of operations. We do not
      engage in currency hedging, therefore inflation has not had a material impact
      on
      our business.




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          26
          -




**Item
      3. Controls and Procedures**




(a)Evaluation of Disclosure Controls and Procedures.




The
      Company’s Chief Executive Officer and Chief Financial Officer conducted an
      evaluation of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures as defined in Securities Exchange Act of
      1934
      Rule 13a-15(e), as of the end of the period covered by this report. Based on
      that evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that the Company’s disclosure controls and procedures were effective
      as of the end of the period covered by this report.




**(b)** **Changes in Internal Control over Financial Reporting.**




There
      were no changes in internal controls over financial reporting that occurred
      during the first quarter of 2006 that have materially affected, or are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




**PART
      II. OTHER INFORMATION**




**Item
      1.** **Legal
      Proceedings**




In
      June
      2006, an action was filed against the Company by Leong Sing Lye in the United
      States District Court for the District of Nevada, seeking specific performance
      and related relief arising from a so-called Appointment Agreement pursuant
      to
      which Mr. Lye alleges to have been appointed the Company’s Consultant of
      Corporate Strategy. The Company has filed an answer to Mr. Lye’s complaint
      denying the material allegations thereof and a counterclaim against Mr. Lye
      for
      fraud and related claims. There
      has
      been no discovery to date and no trial is scheduled. The
      Company intends to vigorously defend against Mr. Lye’s claim, if not withdrawn,
      and pursue its counterclaim. The
      Company does not believe that the ultimate outcome of this matter will have
      a
      material adverse effect on the Company.




**Item
      2.** **Unregistered
      Sales of Equity Securities and Use of Proceeds**




None.




**Item
      3.** **Defaults
      upon Senior Securities**




None.




**Item
      4.** **Submission
      of Matters to a Vote of Securities Holders**




The
      Company has held no regularly scheduled, called or special meetings of
      stockholders during the reporting period.




**Item
      5.** **Other
      Information**




On
      August
      14, 2006, the Company issued a press release announcing its financial results
      for the quarter ended June 30, 2006 and certain other information.




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          27
          -


**Item
      6.** **Exhibits.**




**Exhibit**
              **Number**
            **Description**
            **Method
                of Filing**3.1
            Articles
                of Incorporation of the Company
            Filed
                as Exhibit 3.1 to the registration statement on Form SB-2 filed with
                the
                Commission on October 10, 2003 and incorporated herein by
                reference.3.2
            Amended
                and Restated Bylaws of the Company
            Filed
                as Exhibit 10.1 to the current report on Form 8-K filed with the
                Commission on July 6, 2005 and incorporated herein by
                reference.10.5
            Term
                Sheet
            Filed
                as Exhibit 10.5 to the current report on Form 8-K filed with the
                Commission on August 3, 2006 and incorporated herein by
                reference.21.1
            List
                of subsidiaries
            Filed
                as Exhibit 21.1 to the quarterly report on Form 10-QSB filed with
                the
                Commission on May 15, 2006 and incorporated herein by
                reference.31.1
            Certification
                by the Chief Executive Officer pursuant to Rule 13a-14(a) or
                15d-14(a)
            Filed
                herewith as Exhibit 31.1.31.2
            Certification
                by the Chief Financial Officer pursuant to Rule 13a-14(a) or
                15d-14(a)
            Filed
                herewith as Exhibit 31.2.32.1
            Certification
                of the Chief Executive Officer and the Chief Financial Officer pursuant
                to
                18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002
            Filed
                herewith as Exhibit 32.1.99.1
            Press
                Release Announcing Financial Results for the Quarter Ended June 30,
                2006
            Filed
                herewith as Exhibit 99.1.




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          28
          -


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.




**Harbin
                Electric, Inc.**Date:
                August 14, 2006
            By:
            /s/ Tianfu
                YangTianfu
                YangChief
                Executive Officer, Director and Chairman of the Board
              (Principal
                Executive Officer)





Date:
                August 14, 2006
            By:
            /s/ Zedong
                XuZedong
                XuChief
                Financial Officer
              (Principal
                Accounting Officer)





-
          29
          -




**EXHIBIT
      INDEX**




(a) **Exhibits:**


**Exhibit**
                **Number**
              **Description**
              **Method
                  of Filing**3.1
              Articles
                  of Incorporation of the Company
              Filed
                  as Exhibit 3.1 to the registration statement on Form SB-2 filed
                  with the
                  Commission on October 10, 2003 and incorporated herein by
                  reference.3.2
              Amended
                  and Restated Bylaws of the Company
              Filed
                  as Exhibit 10.1 to the current report on Form 8-K filed with the
                  Commission on July 6, 2005 and incorporated herein by
                  reference.10.5
              Term
                  Sheet
              Filed
                  as Exhibit 10.5 to the current report on Form 8-K filed with the
                  Commission on August 3, 2006 and incorporated herein by
                  reference.21.1
              List
                  of subsidiaries
              Filed
                  as Exhibit 21.1 to the quarterly report on Form 10-QSB filed with
                  the
                  Commission on May 15, 2006 and incorporated herein by
                  reference.31.1
              Certification
                  by the Chief Executive Officer pursuant to Rule 13a-14(a) or
                  15d-14(a)
              Filed
                  herewith as Exhibit 31.1.31.2
              Certification
                  by the Chief Financial Officer pursuant to Rule 13a-14(a) or
                  15d-14(a)
              Filed
                  herewith as Exhibit 31.2.32.1
              Certification
                  of the Chief Executive Officer and the Chief Financial Officer
                  pursuant
                  to 18 U.S.C. Section 1350, as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002
              Filed
                  herewith as Exhibit 32.1.99.1
              Press
                  Release Announcing Financial Results for the Quarter Ended June
                  30,
                  2006
              Filed
                  herewith as Exhibit 99.1.


(b) Reports
      on Form 8-K during the quarter ended June 30, 2006:




(i)
            Form
                8-K filed on August 2, 2006 disclosing the Company’s entry into an
                indicative financing term sheet dated as of August 2, 2006; and




(ii)
            Form
                8-K filed on April 3, 2006 disclosing the Company’s financial results for
                the year ended December 31, 2005 and certain other
                information.